M&A is the financial transaction between the companies to consolidates its business operations and this can be of different types including mergers, acquisitions, purchase of assets, and management buyouts. This term has often been used exchangeable for both mergers and acquisitions but they have different meanings. In this blog, we will learn about the concept of merger and acquisition. This blog is certainly going to help you understand the concept, difference between merger and acquisition, its process, and many more. So, keep going and read the blog thoroughly. We can also help you with Accounting Assignment Help to boost your grades.
Merger and Acquisition Difference
The acquisition is like when one company takes over another company and establishes itself as new management, this majorly happens when a blue-chip company or one big company with its expansion plans to enter some new business segment, want to purchase some growing start-up or loss-making unit that needs restructuring to work well. Meanwhile, after the acquisition, the acquirer company is the operator of the target company and it has a major or full shareholding. For example, a US-based world’s biggest retail company Wall-Mart acquires Flipkart an Indian based e-commerce company that gives an edge to wall-mart in order to tap the online retail market in India.
On the other- hand merger consolidates the two businesses approximately of the same size into one entity with the new name. Both the existing companies mutually agreed to dissolve their existing name and ownership to form a new entity. It doesn’t affect the business operations of the companies while it just a method of creating synergy so that business can reach its new heights. Like the merger of Mobil Corporation and Exxon Corporation in 1999 in the oil and gas industry. They were the leading oil producers at that time and decided to form a new entity Exxon Mobil Corporation to work together.
Advantages of Mergers and Acquisitions
- Creating Synergies - The rationale behind M&A is creating synergies so that business will be valued more with the help of its new human as well as technical assets. It will bring economies of scale to the business, increase the reach of the business while tapping the each-others market, and conclusively scale up the profits.
- Diversification - The companies which have abundant retained earnings or want to avoid the risk of being in one business segment usually plan the diversification through merger and acquisition. It is one of the best ways available for the expansion of the companies as it reduces many risks of starting the new business from scratch.
- Larger market share - Whetherit is a merger or acquisition both will increase the market share of the acquirer company or new company after the merger. Every company has its own customers so acquiring more customers will give the power to influence the prices of the products and larger sales.
- Tax benefits – These benefits looked when the company has significant tax liabilities so in order to avoid tax liabilities, they plan merger or acquisition of a company with accumulated tax liabilities so that they can avoid the total tax liabilities, this is a rare motive behind mergers and acquisitions.
Major Risks involved in the transaction
The motive of every transaction is to create growth opportunities for the business. But the biggest challenges are the conditions that describe the deal, it also came with drawbacks for the parties that are involved in the transactions. So here is the risk that is emerged while the transactions.
- Lacking in due diligence - It is one the most critical process to overcome while M&A transactions. As while purchasing existing assets, it is the seller who holds all the related information. So, before the acquisition company should collect all the possible information about the company’s financial and stakeholders so that they have the best deal on the table. Without the full information seeking-process, the company could end up with some obligations that they were not assuming such as litigation issues or some complicated tax matters.
- Overvaluation - It is one of the common pit-fall of the M&A transaction, the business valuation of the target company is the biggest challenge in this process. The company can be valued with the help of different methods but it totally depends on the type of company it is and the availability of the required data. Like private companies generally didn’t disclose its financials so it is difficult to value them through DCF in which we need historical data to forecast the financials. So private companies majorly get valued through comparable company analysis, where we value the company on the basis of its peers, although all the factors are considered but sometimes it doesn’t give the real value of the company.
- Integration challenge – As we all know all companies have different working cultures as well as strategies of operations. So sometimes this major organizational change doesn’t synergies their operations or create management issues. It is a practical issue we can’t calculate it before starting collaborative operations. According to the Mckinsey research, 90 percent of executives said that cultural fit is vital for the success of integration.
Merger and Acquisition Process
The process of merger and acquisition can be divided into seven steps that are essential to accomplish the process effectively and help the business achieve its goals and objectives.
- Determining growth markets: The management of the organization starts the process of acquisition by identifying the growth opportunities in the market. The sole purpose of merger and acquisition is to expand the business of the organization to sustain in the market and compete with the competitors. It can be achieved if the organization enters a market that has growth potential.
- Identifying merger and acquisition candidates: This is the second step of the process in which organizations identifies potential candidates for merger and acquisition in the market. The potential candidates should meet the strategic financial growth objectives of the organization in the identified market.
- Assessing the strategic financial position of the candidate: The organization needs to assess the financial position of the candidate in order to identify the likely benefits of a transaction with the identified acquisition target.
- Make a decision: After identifying the financial position of the candidate, the organization needs to decide whether it a beneficial deal to acquire or merge with the identified company. Based on the financial position of the candidate, the organization should decide whether to acquire the business or not.
- Conduct valuation: In this step, the organization needs to assess the value of the target. Apart from this, the organization should also identify alternatives for structuring the acquisition transactions.
- Negotiating a definitive agreement, perform due diligence, as well as execute transaction: The management of the acquiring organization should ensure a comprehensive as well as complete due diligence review of the target company as the offer is accepted. It is done to understand the issue, risk, and opportunities associated with the transaction.
- Implementing the transaction and monitoring the performance: This is the final stage of the process of merger and acquisition in which the organization starts performing as a single unit and maximizing strategic value.
I hope you have gained a glimpse of the concept of merger and acquisition. It is a very vast concept. However, we have tried to cover the basics of the concept. In the next blog, we will cover different aspects of merger and acquisition. We have an excellent platform for bright students who are looking to focus on their education. We assist you to focus on your education by providing you Online Assignment Help for all subjects.